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    The effects of interest rate on Islamic bank financing instruments: cross-country evidence from dual-banking systems

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    Author
    Seho, Mirzet
    Bacha, Obaidullah Ismath
    Smolo, Edib cc
    Subject
    Islamic banks
    Financing Instruments
    Interest rate
    Risk-sharing
    Date
    2020
    
    Metadata
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    Abstract
    In theory, the cornerstones of Islamic finance are interest avoidance and risk-sharing. In practice, however, Islamic banks seem to be lacking both, particularly the latter. We investigate the interest rate impact on Islamic banks' three most-widely used types of financing instruments – i.e. sale-based, lease-based and risk-sharing – by employing the system GMM estimators on a unique panel data set of 77 Islamic banks from 13 countries over the period 2003–2017. We find that sale- and lease-based financing instruments are negatively correlated with the interest rate and that their exposure is amplified in more developed Islamic banking jurisdictions. Risk-sharing instruments, however, appear to be out of the interest rate domain of influence except in less developed Islamic banking jurisdictions, where the impact is positive. Additionally, the above effects on sale-based and risk-sharing instruments hold true only in the case of full-fledged Islamic banks and Islamic bank subsidiaries, respectively; the impact on lease-based instruments hold under all specifications. The findings imply that predominant use of sale- and lease-based financing instruments in their current form undermines the interest-free and risk-sharing essence of Islamic banking and runs the risk of converging with its conventional counterpart.
    Department
    Finance
    Journal title
    Pacific-Basin Finance Journal
    DOI
    https://doi.org/10.1016/j.pacfin.2020.101292
    ae974a485f413a2113503eed53cd6c53
    https://doi.org/10.1016/j.pacfin.2020.101292
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